Author Question: Which of the following correctly identifies characteristics of land and capital? A) Land and ... (Read 77 times)

michelleunicorn · **on:** Jun 29, 2018

Which of the following correctly identifies characteristics of land and capital?

A) Land and capital can both be rented and owned.
B) Land is rented, whereas capital is owned.
C) Land can be owned or rented, whereas capital can only be owned by a firm.
D) Capital can be owned or rented by a firm, whereas land can only be owned by a firm.

Question 2

There are three leading manufacturers of smart phones in Techland. Their products are considered to be perfect substitutes.

a) Will these firms earn zero economic profits in the long run? Explain your answer.
b) What can the firms do to earn maximum profit?

joewallace · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

A

Answer to Question 2

a) The market for smart phones in Techland is an example of an oligopoly with homogeneous products. Firms in an oligopoly with homogeneous products often enter into a price war to increase their market share. Each firm cuts its price slightly below its rival's price to capture a larger market share. Because their goods are perfect substitutes, the price-cutting firm faces the entire market demand. This continues as long as the rival's price exceeds marginal cost. In equilibrium, all the firms charge a price equal to marginal cost and earn zero economic profits.

b) The firms can enter into a collusive agreement and decide to set prices jointly. They can coordinate and act like a monopoly. In this case, each firm will charge a price equal to that charged by a monopolist. At this price, each firm will face one-third of the market demand and earn one-third of the total profit earned by a monopolist.